How Do Business Loans Work?
Few business owners have the luxury of choosing whether or not to borrow money from a bank, a friend, or from one of the many lenders that exist. Sometimes even taking on debt can feel daunting for those inexperienced with this process. If you’ve been struggling to decide what type of loan best suits your needs, read on for some guidance.
In this article, you will learn everything you need to know about business loans in the UK, including the following:
- What is a business loan?
- The different types of loans available
- How business loans work
- How to apply for a loan
What Are Business Loans?
Loans are typically used by large businesses and multinational companies when they need capital to fund new projects, acquisitions or expansions.** They allow companies to borrow money from financial institutions like banks or other lending institutions. These financial institutions have an agreement with another company that will provide them with the money in exchange for interest on the debt over time.
Types of Business Loans
Business loans are generally divided into two categories: secured and unsecured. With a secured business loan, the company you are borrowing money from will place collateral in the form of an asset to ensure that they receive back what they lend you. With an unsecured loan, there is no security put in place, which means that the lender is taking a chance on your ability—as well as your creditworthiness—to pay back the amount over time. No matter what type of business loan you choose, it’s vital that you make sure you have adequate collateral in place to secure your loan.
What Is a Business Mortgage
A mortgage is a commonly taken out loan to pay for real property. This can include purchasing an income property or commercial building. Your agreement with the lender states that you will pay back the money you borrow over some time (typically 15 or 30 years), along with interest and additional fees. While traditional home mortgages have relatively fixed rates, adjustable mortgages allow for negative amortisation, which means you make only interest payments on your loan until it is paid off completely. After this, the principal balance will adjust to match the remaining loan amount.
How Business Loans Work
Once a company decides to take out a loan, the lender will create a business loan agreement and send it to you for your approval. Once you receive the agreement back from your lender, there are specific steps that you should follow to complete the application process. To begin with, you should prepare by meeting with your lender often and being prepared on what information they might ask of you.
Once they have received your application, many lenders will perform a credit check to ensure that repayment can be made on time. If this information is satisfactory, they may begin processing your business loan agreement. They will contact your company’s bank to arrange a payment schedule and ensure that they have the money they need to give you. Once the lender has determined an acceptable schedule, they will send you a signed copy of the business loan agreement and any other documentation you might need to sign.
In the next few days, your lender will make arrangements with the bank with which they have a strong relationship. After this, you will receive your money and use it to expand your company in any way you see fit.
How to Apply for a Business Loan?
Applying for a business loan is a process that doesn’t always go smoothly and can be confusing if done without much assistance. Fortunately, there are multiple options available when applying for a business loan, making the process much easier. If you’re looking for financing resources, start by speaking to the financial department at your company and see what types of loans they might be able to help you apply for.
How do Business Loans Work in the UK?
The general process for applying for a business loan differs between countries. However, the basic steps for getting approved for a business loan in the UK are similar to most other countries. Generally, they take about 4-12 weeks from beginning to end, depending on your circumstances. Once the lender has reviewed all of the documentation provided, they will send it along with a final decision.
Most lenders require you to provide documentation to ensure a good credit history—such as your pay stubs and previous tax returns. Your business loan agreement will typically have an interest rate range set based on a simple calculation of the company’s financial position and ability to pay back the loan over time. Interest rates in the UK are typically better than in many other countries. Still, they may differ depending on your industry, whether or not you plan to refinance your debt, and how long the business loan will be taken.
The next step is preparing your company’s financial records for auditing by an independent accountant who might need to review them as part of the application process.
Consider the following questions:
- Do you have enough assets to secure your business loan?
- Are your assets secure enough to be used as collateral for your business loan?
- Do you have a good credit score, and are you currently paying back any other loans?
- Have you had any recent financial changes for which your bank would need time to adjust?
- Will repaying this business loan create an undue hardship for you and your family members?
- Are there any other external factors that will prevent you from repaying this loan on time?
Once the lender has reviewed all of the documentation provided, they will send it along with a final decision. The lender might ask for more paperwork or for you to sign the agreements but will mail the loan agreement and all related documents to you along with their final decision.
Funding options discuss obtaining business loans with bad credit in more detail here.
Other useful links about loans:
Enterprise Finance Guarantees Loans
Asset-Based Lending
Bridging Loans
Remember to Compare Your Business Costs is here to help your business every step of the way from business advice, or saving you time and money on your business purchases such as:
Ally Cox is a dedicated Copywriter and Blogger for CompareYourBusinessCosts.co.uk. In under two years, the platform achieved the esteemed accolade of ‘Website of the Year’. Since its award-winning debut, Ally has been instrumental in fostering organic growth for the website, expanding its offerings to encompass comparisons across a diverse range of over 20 products to help serve all your business needs.